How to navigate uncertainty? Stop managing the manageable

Today’s headlines radiate uncertainty. What will happen with US health care policy? With the allocations in the $4 trillion federal budget? With the US tax structure? With global trade? Even if we guess right on all the policy issues, is the world going to face an economic shock after so many years of steady growth? What will it be? What companies, industries, and countries will it affect the most?

The answer to all those questions is, of course, that nobody really knows. But there’s a better question to ask -- and senior executives can get the answer right in ways that can greatly improve the performance of their organizations.

The question is: With so much uncertainty in the world, why do executives typically spend all their time managing the things they can control? Why not also focus on the uncertainty?

A landmark study in the mid-1990s found that only 55% of a company’s results stemmed from issues that managers could control. That means fully 45% of the results related to effects in the environment -- a recession, a surprise by a competitor, a natural disaster, and so on.

Managers tend to throw up their hands about external surprises. “Who could have known?” “What could we have done?” But that 45% can, in fact, be managed. The secret is to sense the external events quickly and to react faster and more nimbly. Remember: you don’t have to get everything right; you just have to be a little more right than your competitors.

To begin managing those areas traditionally considered unmanageable, senior executives should focus on developing four organizational capabilities.

Mobilize: The starting point is to embrace the uncertainty that paralyzes other organizations. As Nathan Rothschild is reputed to have said: “Great fortunes are made when the cannonballs are falling in the harbor, not when the violins are playing in the ballroom.”

In practice, this means ferreting out the many cognitive biases, such as overconfidence, that can lead to decision-making shortcuts. One way to fight back is to build an inventory of decisions, catalogued based on which can be made now and which require more information. Other tools that help include influence diagrams, real-options analysis, and system dynamics modeling.

If this sounds time-consuming, it is. And one surprisingly common failure mode we see is that leaders fail to block out time to discuss potential future states in the necessary detail.

Execute: It may be a difficult message to hear, but managers must realize that not all strategies are possible for their organization. Selecting a strategy with the least number of execution hurdles and the highest probability of closing the relevant capability gaps is vital. An attractive strategy you can’t execute is useless.

Consider the case of three US hospitals that embarked on a $500 million project to create a superior experience for mothers and infants. To anticipate execution-related problems the team used scenario planning to identify a dangerous execution hurdle: the hospitals hadn’t adequately defined roles and responsibilities. To close the “feasibility gap,” the team set up milestones in the areas that would build momentum and alignment across the three organizations.

Transform: Rather than place all bets on one or two initiatives, companies should take a portfolio approach to investing for the future. Yet organizations must also develop processes that help them objectively, quickly, and relentlessly pull the plug on projects or strategies that are failing. One approach is the “real, win, worth it” framework developed by Wharton’s George Day.

A company eyeing an opportunity in the Chinese tire market used this approach when it faced a tough decision about ramping up production capacity to meet rising local demand. The team’s analysis showed the opportunity was promising in the near term. After stress-testing the company’s business model against the possibility of global overcapacity, however, company leaders realized the short-term profits masked considerable long-term risk, and decided to invest elsewhere -- ultimately avoiding a more significant market collapse.

Agility: Leaders know in their heads that even the most successful companies must adapt, but in their hearts they often fail to recognize how much more dramatic the changes to cherished strategies and processes may need to be.

An industry-leading asset manager shows how to adapt. It had weathered the financial crisis fairly well, but its leaders recognized that the business needed to evolve into passive trading, despite its heritage of active trading. To prepare, the company used behavioral economics research to understand the suboptimal behaviors that could arise among investment managers -- problems including groupthink, excessive risk aversion, and disengagement -- and develop customized approaches to deal with them. For teams with the greatest need, the company provided intensive real-time coaching. Taken together the moves created a win-win situation for the investment managers, the company and, ultimately, its clients.

Surprises will still happen. But if you stop just managing the manageable, it’s likely that your competitors will be the ones saying “Who could have known?” and “What could we have done?”

 

Colin Price is executive vice president and managing partner of the Leadership Consulting Practice at Heidrick & Struggles, and co-author of the book "Accelerating Performance: How Organizations Can Mobilize, Execute and Transform with Agility."

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